Saturday, September 4, 2010 by YES! Magazine
by David Korten
As they say, to get the right answer you have to ask the right question. I'm stunned by how often news reports on Wall Street ask the wrong question, as do our politicians. The August 26, 2010, New York Times front page story "Despite Reform, Banks Have Room for Risky Deals" is a case in point.
The article centers on the Volcker Rule provision of the new financial regulation legislation that "sought to prevent federally insured banks from making speculative bets using their own money." The legislation seems to presume that it is OK for banks to serve as bookies who set the odds and hold bets for gamblers (euphemistically referred to in the article as investors) so long as the banks don't put their own money in play.
The main point of the article is that the big Wall Street banks have difficulty making this distinction, because when they accept a bet for which there is no counterparty, they are actually making the counter bet themselves, i.e., assuming the risk by betting against the client. It becomes more than a little awkward when they are loaning the gambler the money used to place the bet in the first place-thus in effect betting against themselves.
Then add in the fact that these same banks get cheap credit from the Federal Reserve, their depositors are federally insured, and the federal government feels compelled to step in and bail them out when their bets go badly wrong. The result is an impossible web of conflicting interests that Wall Street bankers are highly skilled at turning to their personal advantage.
The implicit question addressed in the article is, "Should banks be allowed to gamble with their own money?" This question has been a subject of extensive debate in Washington and in the press. The question we should be asking is, "What is the proper role and social function of a bank?"
When I studied economics years ago, I recall we were taught that banks serve as financial intermediaries. They take deposits from people in their communities, which they in turn loan to local businesses to invest in productive activities that respond to community needs. The bank absorbs a certain risk in the process, for which it is rewarded with a modest profit.
It seems that as a society we have lost sight of the crucial difference between productive investment and gambling, between the banker and the bookie, and between the insurer and the speculator.
Productive investment in a farm, a factory, a restaurant, a retail store, a cleaning service, education, physical infrastructure, and much more increases the real wealth of the society. The proper function of the banker is to convert savings into productive investment. The role of the bookie is to calculate the odds and hold the bets of people who are gambling on the outcome of a race in which they have no other skin in the game. Gambling on which horse is going to win the Kentucky Derby produces no new value for society.
Wall Street defenders commonly argue that Wall Street speculation stabilizes markets and protects real producers and real consumers from disruptive price swings. Beyond the mounting evidence that Wall Street speculation often creates and accentuates price volatility, this represents a failure to distinguish between the function of the insurer, who serves a vitally important social function by pooling risks to folks who have real skin in the game, and that of the speculator who has no other skin in the game beyond the bet placed with the bookie. It is entirely proper for me to take out fire insurance on my home. It is something else entirely when a stranger places a bet that my house will be destroyed by fire in the coming month.
Conventional banking and insurance are beneficial, indeed essential, social functions and they merit the support of public policy. These functions, however, are of little interest to Wall Street bankers who find gambling, bookmaking, usury, financial fraud, extortion, and the inflation of financial bubbles to be more profitable lines of business. With the benefit of massive public bailout funds, Wall Street is back to business as usual. Productive Main Street businesses continue to be starved of credit, however, because Wall Street is not in the business of funding productive investment.
Whether Wall Street banks have a right to engage in purely predatory activities may be subject to debate. Surely, however, reasonable people can agree that such activities should not enjoy the support of public subsidies and guarantees.
Furthermore, we should be able to agree that conventional banking and insurance functions are essential to the health and function of the society and that we must take steps to create and strengthen specialized institutions designed and managed to perform these functions in response to the real needs of healthy Main Street, real-wealth economies.
To get the right answer, i.e., that the proper function of a bank is to channel savings into real investment, we must start with the right question.
Showing posts with label Volcker Rule. Show all posts
Showing posts with label Volcker Rule. Show all posts
Monday, September 6, 2010
Wednesday, June 30, 2010
US Banks Off the Hook Until 2022
by Andrew Clark | June 29, 2010 by The Guardian/UK
It was billed by Barack Obama as the toughest crackdown on Wall Street since the great depression. But top US banks could be given until 2022 to comply with the so-called Volcker rule, which is supposed to restrict financial institutions' riskier trading activities.
A string of delays and extension periods written into a final version of Congress's financial regulation reform bill means that firms such as Citigroup and Goldman Sachs could exploit loopholes until 2022 before withdrawing from "illiquid" funds such as private equity. The long gestation period is an example of the degree of compromise inserted into the package following months of lobbying on Capitol Hill by powerful banks.
"You can't just say 'stop', you can't just say 'unwind,'" said Lawrence Kaplan, a lawyer at Paul, Hastings, Janofsky & Walker in Washington, who said the delay was a dose of political reality. "These things have contracts and detailed legal frameworks. You can't undo them without doing considerable harm."
The Volcker rule, championed by formed Federal Reserve boss Paul Volcker, stops banks from engaging in "proprietary trading" whereby they trade with their own capital, rather than clients' money. It also severely restricts their investments in high-risk hedge funds and private equity ventures.
Language in the act, according to Bloomberg News, allows for a six-month study and a further nine months of rule-making. The measure is supposed to become effective 12 months after the final rule is laid, then banks have two years to conform. But if they need to, they can apply for a three-year extension. On top of that, a five-year moratorium is available for "illiquid" funds that are hard to unwind.
Complicated caveats in the bill are subject to interpretation. A spokesman for Jeff Merkley, a Democrat who proposed various changes to the rule, told Bloomberg that the maximum delay was supposed to be nine years.
Other measures in Obama's reforms include the creation of a consumer protection agency, the introduction of a vote by shareholders' on boardroom pay and new powers for authorities to seize troubled financial institutions.
For Wall Street, the Volcker rule and curbs on derivatives trading are the most contentious changes. In a research note, analyst Jason Goldberg of Barclays Capital said JP Morgan, Bank of America and Citigroup would be most affected by a ban on proprietary trading. Taken together with the rest of the regulatory reform bill, Goldberg estimated that Obama's crackdown could cut earnings at 26 leading banks by 14% in 2013, eliminating nearly $18bn of profit.
It was billed by Barack Obama as the toughest crackdown on Wall Street since the great depression. But top US banks could be given until 2022 to comply with the so-called Volcker rule, which is supposed to restrict financial institutions' riskier trading activities.
A string of delays and extension periods written into a final version of Congress's financial regulation reform bill means that firms such as Citigroup and Goldman Sachs could exploit loopholes until 2022 before withdrawing from "illiquid" funds such as private equity. The long gestation period is an example of the degree of compromise inserted into the package following months of lobbying on Capitol Hill by powerful banks.
"You can't just say 'stop', you can't just say 'unwind,'" said Lawrence Kaplan, a lawyer at Paul, Hastings, Janofsky & Walker in Washington, who said the delay was a dose of political reality. "These things have contracts and detailed legal frameworks. You can't undo them without doing considerable harm."
The Volcker rule, championed by formed Federal Reserve boss Paul Volcker, stops banks from engaging in "proprietary trading" whereby they trade with their own capital, rather than clients' money. It also severely restricts their investments in high-risk hedge funds and private equity ventures.
Language in the act, according to Bloomberg News, allows for a six-month study and a further nine months of rule-making. The measure is supposed to become effective 12 months after the final rule is laid, then banks have two years to conform. But if they need to, they can apply for a three-year extension. On top of that, a five-year moratorium is available for "illiquid" funds that are hard to unwind.
Complicated caveats in the bill are subject to interpretation. A spokesman for Jeff Merkley, a Democrat who proposed various changes to the rule, told Bloomberg that the maximum delay was supposed to be nine years.
Other measures in Obama's reforms include the creation of a consumer protection agency, the introduction of a vote by shareholders' on boardroom pay and new powers for authorities to seize troubled financial institutions.
For Wall Street, the Volcker rule and curbs on derivatives trading are the most contentious changes. In a research note, analyst Jason Goldberg of Barclays Capital said JP Morgan, Bank of America and Citigroup would be most affected by a ban on proprietary trading. Taken together with the rest of the regulatory reform bill, Goldberg estimated that Obama's crackdown could cut earnings at 26 leading banks by 14% in 2013, eliminating nearly $18bn of profit.
Thursday, April 29, 2010
The Prospects for Real Financial Reform Remain Remote
Teapot Tempest Over Goldman Sachs
By ANDREW COCKBURN
Anyone who believes that Goldman Sachs is made up of coldhearted calculating machines, with scant room for any human emotion apart from avarice, should have been monitoring the firm’s most recent global videoconference. This is a quarterly event in which senior executives address the firm’s managing directors assembled at their various far-flung outposts around the planet. These are normally sober events, but this time, so I am reliably informed, Goldman CEO Lloyd Blankfein was given a standing ovation by the hundred or so executives – “reportedly a first time for such emotional release in the reptile cage” reports one close observer of Goldman culture.
The fact that Goldman stock was rising -- the firm was worth an extra $549 million by day's end -- even as Blankfein and various underlings were being grilled by Carl Levin and others on their misdeeds indicates how little the bank has to fear from the people’s wrath, muffled as it is by the administration and congress. After all, the real threat of Blanche Lincoln’s killer provision on derivatives trading, lurking like a nuclear suitcase in the financial “reform” bill, is already rapidly going away.
As I reported last week, Lincoln introduced this provision, which effectively implements the “Volcker rule” – ballyhooed and then forgotten by Obama a while back – excluding the banks from their most profitable line of proprietary trading in derivatives -- in a fit of pique at Tim Geithner. Word in the lobbying community is that her lapse from normal subservience to Wall Street’s command was deeply gratifying to Pat McCarty, Chief Counsel to Lincoln’s Agriculture Committee.
McCarty has reportedly long chafed at crafting legislation implementing the bankers’ dictates, so it was with great pleasure that he, at Lincoln’s request, told the committee, as well as the lobbyists packing the room, that the bill would deprive derivatives traders of access federal bank insurance programs, especially all those nice bailout vehicles such as the Fed’s discount window, not to mention the deposit guarantee from the FDIC, thus effectively driving JP Morgan etc out of the business.
On the other hand it is hardly possible that Lincoln, still less her fellow Democratic senators, have really decided to usher in the communist revolution by wiping out the banks’ major source of trading profits. Nor will the White House or Treasury permit this to happen. We know this because New York Senator Kirsten Gilliband has been telling emissaries from Barclays Plc so, adding that it would never get through the senate anyway. This was very welcome news for the emissaries, conscious as they were that the top five Wall Street banks made $28 billion in profits from derivatives trading last year, and they rushed to pass on the good news to clients.
Lincoln’s populist lunge hasn’t done her much good in Arkansas, where the latest polls put “Bailout Blanche” further behind her primary (May 18) and general election opponents than ever.
For a few days this week it looked as if the senate Democrats could afford to pose as the flails of Wall Street while the Republicans obligingly blocked debate on the reform bill. Now that the Republicans have abandoned that strategy, we can assume that Blanche’s provision will be taken into a back room and quietly smothered in the interests of bipartisanship.
By ANDREW COCKBURN
Anyone who believes that Goldman Sachs is made up of coldhearted calculating machines, with scant room for any human emotion apart from avarice, should have been monitoring the firm’s most recent global videoconference. This is a quarterly event in which senior executives address the firm’s managing directors assembled at their various far-flung outposts around the planet. These are normally sober events, but this time, so I am reliably informed, Goldman CEO Lloyd Blankfein was given a standing ovation by the hundred or so executives – “reportedly a first time for such emotional release in the reptile cage” reports one close observer of Goldman culture.
The fact that Goldman stock was rising -- the firm was worth an extra $549 million by day's end -- even as Blankfein and various underlings were being grilled by Carl Levin and others on their misdeeds indicates how little the bank has to fear from the people’s wrath, muffled as it is by the administration and congress. After all, the real threat of Blanche Lincoln’s killer provision on derivatives trading, lurking like a nuclear suitcase in the financial “reform” bill, is already rapidly going away.
As I reported last week, Lincoln introduced this provision, which effectively implements the “Volcker rule” – ballyhooed and then forgotten by Obama a while back – excluding the banks from their most profitable line of proprietary trading in derivatives -- in a fit of pique at Tim Geithner. Word in the lobbying community is that her lapse from normal subservience to Wall Street’s command was deeply gratifying to Pat McCarty, Chief Counsel to Lincoln’s Agriculture Committee.
McCarty has reportedly long chafed at crafting legislation implementing the bankers’ dictates, so it was with great pleasure that he, at Lincoln’s request, told the committee, as well as the lobbyists packing the room, that the bill would deprive derivatives traders of access federal bank insurance programs, especially all those nice bailout vehicles such as the Fed’s discount window, not to mention the deposit guarantee from the FDIC, thus effectively driving JP Morgan etc out of the business.
On the other hand it is hardly possible that Lincoln, still less her fellow Democratic senators, have really decided to usher in the communist revolution by wiping out the banks’ major source of trading profits. Nor will the White House or Treasury permit this to happen. We know this because New York Senator Kirsten Gilliband has been telling emissaries from Barclays Plc so, adding that it would never get through the senate anyway. This was very welcome news for the emissaries, conscious as they were that the top five Wall Street banks made $28 billion in profits from derivatives trading last year, and they rushed to pass on the good news to clients.
Lincoln’s populist lunge hasn’t done her much good in Arkansas, where the latest polls put “Bailout Blanche” further behind her primary (May 18) and general election opponents than ever.
For a few days this week it looked as if the senate Democrats could afford to pose as the flails of Wall Street while the Republicans obligingly blocked debate on the reform bill. Now that the Republicans have abandoned that strategy, we can assume that Blanche’s provision will be taken into a back room and quietly smothered in the interests of bipartisanship.
Tuesday, February 23, 2010
Ex-Treasury secretaries back Volcker rule
Ex-Treasury secretaries back Volcker rule
Sun, Feb 21 2010
WASHINGTON (Reuters) - Five former Treasury secretaries urged Congress on Sunday to bar banks that receive federal support from engaging in speculative activity unrelated to basic bank services.
Sun, Feb 21 2010
WASHINGTON (Reuters) - Five former Treasury secretaries urged Congress on Sunday to bar banks that receive federal support from engaging in speculative activity unrelated to basic bank services.
"The principle can be simply stated," the five said in a letter to The Wall Street Journal. "Banks benefiting from public support by means of access to the Federal Reserve and FDIC insurance should not engage in essentially speculative activity unrelated to essential bank services."
The Treasury secretaries said, however, that hedge funds, private-equity firms and other organizations engaged in speculative trading should be "free to compete and innovate" but should not expect taxpayers to back up their endeavors.
"They should, like other private businesses, ... be free to fail without explicit or implicit taxpayer support," said the former secretaries for both Republican and Democratic presidents.
The appeal comes as Senate lawmakers are pressing ahead with efforts to produce a financial regulatory reform bill that would curb some of the practices that led to the 2008 financial crisis.
Several major financial firms collapsed, were sold or had to be bailed out after a bubble in the housing market popped, causing real estate prices to plummet and leaving markets uncertain about the value of billions of dollars in mortgage-backed securities.
The liquidity crisis that followed threatened the financial system and deepened a U.S. recession that became the worst since the Great Depression.
The regulatory reform proposal endorsed by the five former Treasury secretaries is the so-called Volcker Rule, formulated by former Federal Reserve Chairman Paul Volcker, a top economic adviser to President Barack Obama.
Obama surprised the financial markets in late January when he announced the proposal, which calls for new limits on banks' ability to do proprietary trading, or buying and selling of investments for their own accounts unrelated to customers.
Volcker told the banking committee earlier this month that a failure to adopt trading limits would lead to another economic crisis and warned "I may not live long enough to see the crisis, but my soul is going to come back and haunt you" if proprietary trading is not curbed.
The five former Treasury secretaries -- Michael Blumenthal, Nicholas Brady, Paul O'Neill, George Shultz and John Snow -- said in their letter that banks should not be involved in speculative trading activity and still receive taxpayer backing.
"We fully understand that the restriction of proprietary activity by banks is only one element in comprehensive financial reform," their letter said. "It is, however, a key element in protecting our financial system and will assure that banks will give priority to their essential lending and depository responsibilities."
Subscribe to:
Posts (Atom)